Stamford Associates

A Message from Lord Pickles and Lord Blunkett, followed by Stamford Associates's best practice article

The ability to listen and learn from one another has always been vital in parliament, in business and in most aspects of daily life. But at this particular moment in time, as national and global events continue to reiterate, it is uncommonly crucial that we forge new channels of communication and reinforce existing ones. The following article from Stamford Associates is an attempt to do just that. We would welcome your thoughts on this or any other Parliamentary Review article.

Blunkett signature Rt Hon The Lord David Blunkett
Pickles signature Rt Hon The Lord Eric Pickles

Highlighting best practice
Nathan Gelber, chief
investment officer
Whether running a business or managing a pension
scheme, cash flow matters. However, within the
defined benefit pensions industry there is an
overbearing focus on risk measures linked to the future “value”
of member benefit payments, rather than the risks associated
with actually delivering the cash flows when they are due.
Stamford Associates believes this creates a distorted picture of
the challenges facing pension schemes, raising greater concerns
than are generally warranted over their ability to deliver
member benefit promises. The following article, authored by
head of fiduciary management advisory, Carl Hitchman, gives
an exposition of the challenges faced by this sector, and how
Stamford Associates seeks to surmount them.
Ensuring the right goals are pursued
Our goal since the inception of our firm more than 30 years ago has been to assist
clients in generating attractive long-term investment results that are consistent with
their investment objectives. Key to this is to avoid the permanent impairment of
capital. While this may seem obvious to most people, unfortunately our industry
has an insatiable appetite for arbitrary benchmarks that are used to assess whether
or not an investment has been successful. Outperforming a benchmark is often
viewed as a triumph, even if the actual return is negative, and this can influence
investment behaviour in such a way that may not be in the long-term best interests
of pension schemes.
This focus on benchmarks is also reflected in how a pension scheme’s financial
health is assessed; typically comparing the performance of its assets against a
liability benchmark that, broadly speaking, represents the cost of securing future
member benefits with an insurance company. Trustees typically look to generate
an investment return in excess of this benchmark, often with the aim of closing the
gap between the value of the assets held and that needed to insure the promised
benefits. Instead of focusing on the ability of the scheme to pay pensions as and
when they fall due, funding and investment decisions are often driven by managing
the risk of changes in the cost of this insurance.
The challenge for trustees is that they have been chasing a moving target. While
investment techniques are available to mitigate this risk and asset returns have
generally been strong, the cost of insuring member benefits has for many proved
prohibitive. Indeed, figures provided by the Pension Protection Fund (The Purple
Book, 2017) indicate the aggregate deficit for schemes in deficit relative to the cost
of insurance increased by over 40 per cent between 2008 and 2017. Unfortunately,
»CIO: Nathan Gelber
»Established in the mid-1980s
»Based on Old Bond Street,
»Services: Investment advice for
institutional clients
»No. of employees: 35
»Circa £65 billion under advice
as of March 31, 2018
»Distinctive active investment
approach with a focus on
absolute returns, leveraging
the skills of in-house
Stamford Associates
such sensational headlines can
influence professional advice to
trustees and, consequently, their
investment behaviour.
However, when you consider the
future rates of return required by
many pension schemes to deliver
member benefits over their lifetime,
they can appear quite modest by
historical standards due to the strong
investment performance achieved over
recent years and the amount of deficit
contributions paid by many sponsoring
We fear the way in which
financial health metrics have been
communicated may have created
an unbalanced picture and had a
bearing on the closure of a number of
schemes. While, alas, it may be too late
to reverse these decisions, we believe
an investment approach that aims to
deliver the required absolute returns
by when they are needed will give all
stakeholders greater confidence that
member benefits will be paid in full.
Indeed, with more and more schemes
turning cash flow negative, it becomes
increasingly important to manage
the risk of disinvesting assets at an
inappropriate time.
Identifying a solution
During 2017 we undertook a
detailed review of the challenges
facing trustees and their corporate
sponsors. The result is our new
fiduciary management advisory (FMA)
proposition that we believe will
effectively address the investment
strategy challenges discussed above.
Our starting point is the pension
scheme cash flows. We aim to identify
suitable asset classes for the time
horizon relevant to each net outflow
and, within those asset classes, identify
talented investment managers who we
expect to deliver the required returns
by the necessary time.
Our FMA approach is built upon the
foundations that have seen our assets
under advice grow to circa £65 billion
(as at 31 March 2018). We are firm
believers in active management for
most asset classes and that individuals,
not institutions, make investment
decisions. Our manager selection and
ongoing monitoring process reflect
these beliefs in a very distinctive way.
Alongside our detailed investment and
operational scrutiny of asset managers,
we also incorporate considered
assessments from our in-house
psychologists on the behaviours and
cognitive biases within the decision-
making processes of the portfolio
managers. We believe this yields
materially deeper insights and acumen
than could otherwise be achieved.
Investment success relies not only
on good ideas but also on having
a robust governance structure in
place. A distinguishing feature of our
services is the oversight of many of
our manager selection and portfolio
construction recommendations by
an external independent investment
committee. For our FMA proposition
this governance structure creates a
framework that allows trustees to
focus on investment strategy issues
and facilitates the delegation of many
investment implementation and
operational issues that can “clog up”
trustee agendas.
The recent policy paper from the
Department for Work and Pensions
entitled “Protecting Defined Benefit
Pension Schemes” and the ongoing
review by the Competition & Markets
Authority of investment consultants
and fiduciary managers highlights
much for the pension industry to
consider. Underlying all of this is the
delivery of member benefit promises
and we believe that an investment
strategy designed specifically with a
scheme’s cash flows in mind will go a
long way in achieving this.
Professor Adrian
Furnham and Elaine
Tyler, psychologists
Carl Hitchman, head of
fiduciary management
Psychology –
exploiting the
silent “p” in
investment. Our
work is informed
by organisational
and personality
psychology as
well as
Professor AdrianFurnham,
principal, behavioural
psychology at Stamford

This article was sponsored by Stamford Associates. The Parliamentary Review is wholly funded by the representatives who write for it. The publication in which this article originally appeared contained the following foreword from The Rt Hon Theresa May MP.

The Rt Hon Theresa May MP's Foreword For The Parliamentary Review

By The Rt Hon Theresa May MP

This foreword from the then Prime Minister appeared in the 2018/19 Parliamentary Review.

British politics provides ample material for analysis in the pages of The Parliamentary Review. For Her Majesty’s Government, our task in the year ahead is clear: to achieve the best Brexit deal for Britain and to carry on our work to build a more prosperous and united country – one that truly works for everyone. 

The right Brexit deal will not be sufficient on its own to secure a more prosperous future for Britain. We also need to ensure that our economy is ready for what tomorrow will bring. Our Modern Industrial Strategy is our plan to do that. It means Government stepping up to secure the foundations of our productivity: providing an education system that delivers the skills our economy needs, improving school standards and transforming technical education; delivering infrastructure for growth; ensuring people have the homes they need in the places they want to live. It is all about taking action for the long-term that will pay dividends in the future.

But it also goes beyond that. Government, the private sector and academia working together as strategic partners achieve far more than we could separately. That is why we have set an ambitious goal of lifting UK public and private research and development investment to 2.4 per cent of GDP by 2027. It is why we are developing four Grand Challenges, the big drivers of social and economic change in the world today: harnessing artificial intelligence and the data revolution; leading in changes to the future of mobility; meeting the challenges of our ageing society; and driving ahead the revolution in clean growth. By focusing our efforts on making the most of these areas of enormous potential, we can develop new exports, grow new industries and create more good jobs in every part of our country.

Years of hard work and sacrifice from the British people have got our deficit down by over three quarters. We are building on this success by taking a balanced approach to public spending. We are continuing to deal with our debts, so that our economy can remain strong and we can protect people’s jobs, and at the same time we are investing in vital public services, like our NHS. We have set out plans to increase NHS funding annually by an average by 3.4 percent in real terms: that is £394 million a week more. In return, the NHS will produce a ten-year plan, led by doctors and nurses, to eliminate waste and improve patient care.

I believe that Britain can look to the future with confidence. We are leaving the EU and setting a new course for prosperity as a global trading nation. We have a Modern Industrial Strategy that is strengthening the foundations of our economy and helping us to seize the opportunities of the future. We are investing in the public services we all rely on and helping them to grow and improve. Building on our country’s great strengths – our world-class universities and researchers, our excellent services sector, our cutting edge manufacturers, our vibrant creative industries, our dedicated public servants – we can look towards a new decade that is ripe with possibility. The government I lead is doing all it can to make that brighter future a reality for everyone in our country. 

British politics provides ample material for analysis in the pages of The Parliamentary Review 
The Rt Hon Theresa May MP
Prime Minister